Crowdfunding platform catches on

Financial markets are all in a twist, leaving few options for investors looking for good returns or a solid income yield.

In the meantime, with the economy slowing, banks are becoming more conservative about who they lend money to and how much, making it tougher for small and medium-sized enterprises (SMEs) seeking funds to expand.

Enter the crowdfunding platform, which seeks to solve both problems at one go.

While market watchers and economists are predicting doom and gloom for 2016, the young, innovative players on the platform look set to come out of this tough year as winners - though they are also clear- eyed about the challenges.

Investors are increasingly turning to them as a means of earning better returns for their money, and more SMEs are gaining awareness of this source of alternative financing, seeking them out for loans.

"A lot of people ask, 'Isn't it going to be a lot worse for you (with the economic slowdown)?'" said Mr Benjamin Twoon, the Indonesia country director at crowdfunding start-up Fundnel.

"But, in fact, this is where the opportunity is because we are becoming extremely relevant to people who cannot access traditional forms of financing. It's a need versus a want - we are becoming more and more of a need rather than a 'good to have'."

Fundnel is one of several crowdfunding firms that have launched in Singapore over the past 12 months. Since its platform went live in October, it has completed five transactions, helping companies to raise about US$5 million (S$7 million), and has 30 more deals in the works.

It offers business owners a variety of ways to raise funds, including selling shares and issuing convertible bonds, and a sizeable number of the investors on its platform are experienced angel investors.

Most other players focus on a simpler peer-to-peer lending model. MoolahSense, Capital Match and Funding Societies, for instance, provide a platform through which SMEs can get loans from retail investors, who in turn stand to earn interest payments of up to 21 per cent a year on each loan.

All have been seeing rapid growth, which they credit to a combination of factors, including increased awareness among SMEs about the existence of such platforms and the tightening supply of credit from banks.

When it launched its platform in June last year, for example, Funding Societies helped raise about $300,000 for its SME clients in the first month. By yearend, it had crowdfunded about $3 million.

It could grow even faster, if not for its stringent assessment of all potential borrowers: only about 15 per cent of the SMEs that come knocking on its door get approval to raise funds on the platform.

Co-founder Kelvin Teo said: "We have seen an exponential increase in the number of SMEs coming to us. Some do not have a long credit history and are not bankable yet, while others can get bank loans, but not as much as they need, so they come to us for top-ups."

MoolahSense, the first peer-to- peer lending platform on the scene, has helped raise $5 million in loans for 22 SMEs since it was launched in late 2014.

Chief executive Lawrence Yong has seen a sharp rise in the number of enquiries from SMEs looking to raise funds on the platform, and hopes the firm can help raise $25 million in loans this year.

By his estimate, there is $37 million worth of liquidity from the platform's pool of investors waiting to be tapped.

He plans to expand the platform's offerings, for example, by introducing a "COE-like" auction mechanism. "The issuer could say, for example, that he wants to procure $100,000, and doesn't wish to pay more than 10 per cent interest.

"If there's a lot of demand and it's oversubscribed, it would make the whole process more competitive as allocation would be prioritised from the lowest interest rate offered.

"An issuer who has a superb reputation could then use the auction method to procure a lower cost of funds from investors."

One platform already offering this is InvoiceInterchange, which allows SMEs to put up their unpaid invoices for auction.

Take a supplier of goods to major supermarkets: It has an invoice which says one of its big clients will pay it $50,000 in 60 days but it needs funds now to pay salaries, buy more goods or for daily operational expenses. It could offer to pay, for example, up to 2 per cent of that amount to investors who can buy all or part of that $50,000 invoice today.

Through InvoiceInterchange, an investor can then offer to contribute, say, $5,000 towards that upfront cash disbursement, and ask for up to 2 per cent interest payment in return, over 60 days.

Since launching last May, the company has helped raise around $800,000 for its seven SME clients, six of which have done repeat transactions on the platform.

There are 38 investors on the platform, which is for registered members. (The firm screens not only borrowers but also investors before letting them join.)

"We hope to have 100 SME clients by the end of this year, and 291 investors," he said.

"What we're hearing from SMEs is that bank overdrafts and loans are just not being approved as quickly and are not as easily available as before. In some cases, credit lines are being reduced or even pulled. We want to help SMEs finance their growth."

But even as the crowdfunding scene looks like it has the potential to grow exponentially this year, the players are still maintaining a sober perspective on things.

After all, an economic slowdown means more companies will face financial difficulties, which makes it all the more important for crowdfunding firms to be vigilant about who they take on as borrowers, noted CapitalMatch director Pawel Kuznicki.

"I think it's a year for caution. It's better to have fewer loans than loans going into default."

Funding Societies' Mr Teo agreed, saying that aside from analysing third-party credit ratings and financial documents and conducting interviews, his team goes as far as making unannounced visits to the office addresses of potential clients, just to make sure they are not fraudsters.

"And in fact, we have come across cases where today we visit and the business is there. A week later, when we make an unannounced visit, the office is no longer occupied," he said.

And there is still a lot of groundwork that needs doing by these young companies.

InvoiceInterchange will be focusing on hiring staff this year and raising awareness of its cash flow solution to SMEs in Singapore.

For Fundnel, 2016 will be all about educating both the public and themselves.

"We're going to be on the ground as much as possible to get in touch with what businesses really want. We've dedicated part of our budget to attending and holding conferences regionally and meeting businesses that have come onto the platform," said chief marketing officer Justin Chow.

"We've also come to realise that some of the platform's build is a bit idealistic - for example, some of the information we ask for is about things that companies may not want to share or don't even have. So if it's a matter of fixing the platform or allocating resources to helping businesses get on board, then we'll do that."

yasminey@sph.com.sg

This article was first published on February 4, 2016. Get a copy of The Straits Times or go to straitstimes.com for more stories.